Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Why Alphabet Inc.'s Cost-per-Click Rates Just Don't Matter

As the world goes mobile, the search king’s rate for paid ad clicks continues to decline, but does it really matter?

Based on its over-7% stock price jump following Q3 earnings news announced on Oct, 22, it's safe to say most investors were fairly happy with the now-named Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) third-quarter financial results. Even with its massive size, Alphabet still improved revenue double-digits last quarter to $18.7 billion.

A key aspect of Alphabet's Q3, per CFO Ruth Porat, was its marked improvement in mobile-related ad sales. Enhanced mobile efforts were particularly good to hear given Alphabet's much-discussed problems with its continually dropping cost-per-click (CPC) rates. Marketers are loathe to pay the same fees for mobile spots as they are desktop ones, which negatively impacts Alphabet's CPC rate. Based on some new research, along with Alphabet's ongoing improvements in its CPC-specific results, it appears its "problems" will soon go by the wayside.

How bad was it, really?On an aggregate basis -- which is the combined CPC rates of both Alphabet-owned websites along with its network members -- last quarter's 11% decline in click fees could have been viewed as the continuance of a disturbing trend. But Alphabet's focus on mobile-friendly search and its dominant market share more than made up for the CPC rate drop.

In the U.S., Alphabet owns nearly two-thirds of the desktop search market, and globally smartphones are quickly becoming nearly as popular to conduct online search queries, which helps to explain why last quarter's CPC rates were of little concern. A 23% jump in the number of paid clicks Alphabet enjoyed last quarter more than made up for declining fees, and investors can expect more of the same in Q4.

To put Alphabet's search dominance into perspective, second-place Microsoft(NASDAQ:MSFT) is making strides in turning around its Bing search unit, and was quick to point out that it now commands over 20% of the U.S. market. Bing's 29% jump in ad sales in fiscal 2016's Q1 was also a feather in Microsoft's search cap. And based on a recent survey conducted with U.S. marketers, both search giants can expect more growth this year and beyond.

Survey saysWith the advent of video spots, search-based text ads don't have the same panache as they once did, but that doesn't mean marketers aren't enamored with the tried-and-true spots. In fact, the vast majority of the folks responsible for their company's advertising budgets not only like click ads, they intend on spending even more this year than they did in 2014.

As per research from Hanapin Marketing, just shy of 80% of the marketing pros asked said their pay-per-click (PPC) campaigns performed "really good" so far this year, and an impressive 60% responded that the spots were more successful this year than 2014. Leading the good tidings among U.S. marketers were text ads, like Alphabet's search alternatives.

Naturally, when marketers are seeing a return on their investment -- as they clearly are from their satisfaction around PPC ad results -- you can bet that will continue. As it happens, nearly 75% of the marketing pros asked plan to increase spending on Alphabet's AdWords platform, and 60% said they intend to invest more in Bing ads in the coming year.

As Alphabet demonstrated last quarter, and recent data strongly supports, CPC rates mean little in the overall scheme of things. As long as Alphabet, and Microsoft's Bing for that matter, continue to grow the number of paid clicks, search ad revenue will climb despite the fees spent on each, individual spot. Based on the overwhelmingly positive feedback from marketers, click-related ad sales have a bright future: just as Alphabet shareholders do.

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.